Postretirement Benefits

9 Months Ended

Sep. 30, 2011

Postretirement Benefits

Postretirement Benefits

9. Postretirement Benefits

A.  Pension and postretirement benefit costs

As announced in August 2010, on January 1, 2011, our retirement benefits for U.S. support and management employees began transitioning from defined benefit pension plans to defined contribution plans.  The transition date was determined for each employee based upon age and years of service or proximity to retirement.  Pension benefit accruals were frozen for certain employees on December 31, 2010, and will freeze for remaining employees on December 31, 2019.  As of these dates employees will move to the new retirement benefit that will provide a frozen pension benefit and a 401(k) plan that will include a matching contribution and a new annual employer contribution.  The plan change required a re-measurement as of August 31, 2010, which resulted in an increase in our Liability for postemployment benefits of $1.32 billion and a decrease in Accumulated other comprehensive income (loss) of $831 million net of tax.  The increase in the liability was due to a decline in the discount rate and lower than expected asset returns at the re-measurement date.  Curtailment expense of $28 million was also recognized for the three and nine months ended September 30, 2010 as a result of the plan change.

In March 2010, the Patient Protection and Affordable Care Act (the PPACA) and the Health Care and Education Reconciliation Act of 2010 (H.R. 4872) which amends certain provisions of the PPACA were signed into law.  As discussed in Note 13, the Medicare Part D retiree drug subsidies effectively become taxable beginning in 2013.

(Millions of dollars)	U.S. Pension Benefits		Non-U.S. Pension Benefits		Other Postretirement Benefits
	September 30,		September 30,		September 30,
	2011	2010	2011	2010	2011	2010
For the three months ended:
Components of net periodic benefit cost:
Service cost	$41	$53	$28	$23	$21	$17
Interest cost	164	162	45	42	64	62
Expected return on plan assets	(200)	(193)	(50)	(50)	(18)	(24)
Amortization of:
Transition obligation (asset)	—	—	—	—	1	—
Prior service cost (credit) 1	5	6	1	1	(14)	(14)
Net actuarial loss (gain)	112	96	18	17	27	9
Net periodic benefit cost	122	124	42	33	81	50
Curtailments, settlements and special termination benefits 2	—	28	—	9	—	—
Total cost included in operating profit	$122	$152	$42	$42	$81	$50
For the nine months ended:
Components of net periodic benefit cost:
Service cost	$118	$150	$83	$69	$62	$50
Interest cost	488	495	132	124	190	184
Expected return on plan assets	(598)	(574)	(150)	(148)	(53)	(70)
Amortization of:
Transition obligation (asset)	—	—	—	—	2	1
Prior service cost (credit) 1	15	20	2	1	(41)	(41)
Net actuarial loss (gain)	338	271	54	51	81	25
Net periodic benefit cost	361	362	121	97	241	149
Curtailments, settlements and special termination benefits 2	—	28	9	17	—	—
Total cost included in operating profit	$361	$390	$130	$114	$241	$149
Weighted-average assumptions used to determine net cost:
Discount rate	5.1%	5.6%	4.6%	4.8%	5.0%	5.6%
Expected return on plan assets	8.5%	8.5%	7.1%	7.0%	8.5%	8.5%
Rate of compensation increase	4.5%	4.5%	4.2%	4.2%	4.4%	4.4%

1 Prior service costs for both pension and other postretirement benefits are generally amortized using the straight-line method over the average remaining service period to the full retirement eligibility date of employees expected to receive benefits from the plan amendment. For other postretirement benefit plans in which all or almost all of the plan’s participants are fully eligible for benefits under the plan, prior service costs are amortized using the straight-line method over the remaining life expectancy of those participants.

2 Curtailments, settlements and special termination benefits were recognized in Other operating (income) expenses in the Consolidated Statement of Results of Operations.

We made $105 million and $340 million of contributions to our U.S. and non-U.S. pension plans during the three and nine months ended September 30, 2011, respectively. We currently anticipate full-year 2011 contributions of approximately $440 million.  We made $409 million and $957 million of contributions to our U.S. and non-U.S. pension plans during the three and nine months ended September 30, 2010, respectively.

B.  Defined contribution benefit costs

From June 2009 to October 2010, we funded our employer matching contribution for certain U.S. defined contribution plans in Caterpillar stock, held as treasury stock.  For the three and nine months ended September 30, 2010, we made $31 million (0.5 million shares) and $93 million (1.5 million shares) of matching contributions in Caterpillar stock, respectively.

On January 1, 2011, matching contributions to our U.S. 401(k) plan changed for certain employees that are still accruing benefits under a defined benefit pension plan.  Matching contributions changed from 100% of employee contributions to the plan up to six percent of their compensation to 50% of employee contributions up to six percent of compensation.  For employees whose defined benefit pension accruals were frozen as of December 31, 2010, we began providing a new annual employer contribution in 2011, which ranges from three to five percent of compensation, depending on years of service and age.

Total company costs related to U.S. and non-U.S. defined contribution plans were as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
(Millions of dollars)	2011	2010	2011	2010
U.S. Plans	$3	$77	$135	$160
Non-U.S. Plans	14	8	40	24
	$17	$85	$175	$184